Washington (AP) - The Senate has long been seen as opposed to the federal government selling health insurance in competition with private industry, but now senior Senate Democrats and White House officials are strongly considering including such a measure in health care overhaul legislation, officials say.

The provision would permit individual states to drop out of the system, a design that could make it more palatable to moderates who have opposed the "public option."

Liberals in Congress view a public option as an essential ingredient to overhaul the nation's health care system, and President Barack Obama has said frequently he favors it. But he has also made clear it is not essential to the legislation he seeks, a gesture to Democratic moderates who have opposed it.

Sens. Ben Nelson, D-Neb., and Kent Conrad, D-N.D., said in separate interviews they had been told the plan was drawing interest in private negotiations led by Senate Majority Leader Harry Reid, D-Nev., who is merging health bills passed by two separate committees into a final package to bring to the floor.

"What I'm hearing is that this is the direction of the conversation," said Conrad, who supports an alternative approach under which nonprofit co-ops would compete with private industry.

Nelson said he'd also heard the plan was drawing favor, adding he thought that was unfortunate.

The White House declined to comment. Reid's office did likewise, and the Nevada Democrat left a meeting at the White House with other Democrats late Thursday without talking to reporters.

Several officials said no final decisions had been made, with one possibility that the idea was being circulated to see whether it could attract enough support to survive on the Senate floor.

If not, it surely would be jettisoned beforehand, with liberals urged to accept something less or risk defeat of health care legislation. There is little margin for error among Obama's allies in the Senate as they confront nearly unanimous Republican opposition.

Democratic moderates are skeptical of allowing the government to sell insurance, concerned that it would mark an unwarranted federal intrusion into the private marketplace and potentially jeopardize payment rates to doctors, hospitals and other providers.

Conrad, for example, has said repeatedly he could not accept a plan with payments tied to Medicare, the federal health care program for the elderly, because rates in North Dakota are too low to give doctors an incentive to treat additional patients.

Legislation taking shape in the House is also expected to include a public option, although it is unlikely states would be allowed to opt out.

After months of struggle, both houses are expected to vote in the next few weeks on sweeping legislation that expands coverage to millions of Americans who lack it and bans industry practices such as denial of coverage for pre-existing medical conditions.

The House and Senate measures aim to expand coverage to about 95 percent of the population, and include federal subsidies to help lower-income families afford coverage and permit small businesses to provide it for their employees.

The two bills differ at many points, although both are paid for through a combination of cuts in future Medicare spending and higher taxes.

House Speaker Nancy Pelosi said at a news conference she and her leadership were entering the "final stages" of assembling a health care bill to be voted on this fall. Officials have said the measure would cost $871 billion over a decade, but that total excluded a handful of items not directly related to expanded coverage that would push the total to well over $1 trillion.

Democrats hold a 60-40 majority in the Senate, counting two independents, precisely the number needed to overcome a threatened Republican filibuster. Sen. Olympia Snowe, R-Maine, voted for the health care bill that cleared the Senate Finance Committee recently, but she has long voiced opposition to a public option along the lines under consideration, as has Nelson, and other moderate Democrats have voiced skepticism.

Without 60 votes, the legislation could stall even before debate began in earnest.